Wednesday, 15 April 2015

RBNZ on Housing

We should expect the Reserve Bank to provide in-depth analysis to back its claims around the housing market. But in a 19 page speech, only five paragraphs are devoted to the “housing pressures are a threat to stability” section. And if not everything can elaborated in a speech, we might expect to see links to recent Reserve Bank research in the area – but there are no such links, and not even references to the issue of the Bulletin published only a few weeks ago which cited international research suggesting that housing mortgage loans have rarely played a major role in systemic banking crises. Issues of the Bulletin are generally regarded as speaking for the Bank, so it might be useful for the Bank to clarify just where it stands, and why. New Zealand might be different, but if so why does the Bank think this is likely? Perhaps the Bank can point us to countries in which private sector credit growth of around 5 per cent per annum, from starting levels of PSC/GDP that are still materially below the peaks reached 7-8 years ago, have led to serious threats to financial system soundness, or even to wider economic stability.

The Deputy Governor has been consistently reluctant to engage with the proposition that any financial stability risks must have been much greater in 2007 than they are now. In the years leading up to 2007 we had seen:

Very rapid nationwide growth in real house prices, on a scale not seen previously in modern New Zealand history

Very rapid growth in credit and credit-to-GDP, on scales consistent with some of the international indicators that have been taken as suggesting heightened risk of crisis.

A long-running period of economic expansion and consistently high levels of optimism

High levels of real investment in housing

Rapid growth in commercial property and farm prices, and in the associated stocks of credit.

All of which was followed by one of the nastier recessions New Zealand has seen in the post-war period, and a double-dip recession in 2010. GDP per capita (real and nominal) settled onto a much lower track than had previously been expected – so that many borrowers’ income expectations proved to be quite severely disappointed.

Nominal house prices did fall during the recession, and by more than the Reserve Bank projected at the time. And yet with all these factors, the soundness of our systemic institutions was never questioned (even in the midst of a global panic centred on concerns around housing) and the level of impaired housing loans rose only modestly to extremely low levels.

The current climate just does not bear comparison. If the Reserve Bank disagrees, it would be helpful for them to lay out their arguments and evidence.

Go read the whole thing. He also hits on whether any tax advantage lies with unleveraged owner-occupiers or those nasty investors.